BASEL II

New Capital Adequacy Framework

CRAB's Services for Bank Clients

Corporate/Entity/Issuer Rating
Bank Loan/Line of Credit Rating

C R E D I T R AT I N G A G E N C Y O F B A N G L A D E S H LT D .
ABOUT CRAB

Credit Rating Agency of Bangladesh Limited (CRAB) was set

up in 2003 by leading financial/investment institutions and
individuals as an independent and professional full service
Credit Rating Agency. ICRA Ltd, India subsidiary of
international Credit Rating Agency Moody's Investors Service,
USA is the technical partner of CRAB. CRAB is a Public
Limited Company.

Mr. M. Syeduzzaman, former Finance Minister, is the Chairman

of the Company. Mr. Md. Matiul Islam, former Finance
Secretary is the Vice Chairman. Mr. Hamidul Huq, former MD
of United Commercial Bank Ltd is the Managing Director. He is
aided by a pool of experienced and trained professionals.
BOARD OF DIRECTORS

CHAIRMAN
M. Syeduzzaman
Former Finance Minister, Govt. of Bangladesh

VICE CHAIRMAN
Md. Matiul Islam, FCA
Chairman, Industrial and Infrastructure
Development Finance Company Ltd.
Former Secretary of Finance, Govt. of Bangladesh

DIRECTORS

Samson H. Chowdhury Syed Manzur Elahi
Chairman, Square Phamaceuticals Chairman, Apex Footwear Ltd. &
Ltd. Astras Ltd. Apex Tannery Ltd.
Former Advisor to the Caretaker
Govt. of Bangladesh
M. Haider Chowdhury Mir Mustafizur Rahman
Former Chairman, National Life Former Secretary of Finance,
Insurance Co. Ltd. Govt. of Bangladesh

Muhammed Faizur Rahman A. S. M. Quasem

M. Anis Ud Dowla A K M Rafiqul Islam, FCA
Chairman, Asian Surveyors Ltd. Chairman, New Age Group
Chairman, ACI Ltd. Managing Director, Pragati
Insurance Ltd.

Sohail Humayun Md. Humayun Kabir Hamidul Huq

Managing Director, Investment Managing Director Managing Director
Managing Director, Unicorn IDLC Finance Ltd.
Equities Ltd Corporation of Bangladesh Credit Rating Agency of
Bangladesh Ltd.
 RATING COMMITTEE

CRAB's ratings are awarded by an independent rating committee

comprising of former Deputy Governors of Bangladesh Bank, former
Comptroller & Auditor Generals, noted economists, former Chairman
of Securities & Exchange Commission, Islami Bank specialist etc.

Dr. Mohammad Haroonur Rashid Dr. Muzaffar Ahmed

Former Secretary and Member Planning Noted Economist
Commission and Chairman of Securities & Former Director, Institute of Business
Exchange Commission of Bangladesh Administration, Dhaka University

Dr. AB Mirza Md Azizul Islam Mohammad Sohrab Uddin Ph.D, AIA

Former Advisor to Caretaker Govt. of Actuary, Former Deputy Governor,
Bangladesh, Former Chairman of Securities & Bangladesh Bank
Exchange Commission of Bangladesh

Ataul Haq Khondkar Ibrahim Khaled

Former Deputy Governor, Bangladesh Bank Former Deputy Governor, Bangladesh Bank
Former Managing Director, IFIC Bank Ltd Chairman, Bangladesh Krishi Bank
ECAI STATUS
Bangladesh Bank accredited
CRAB as an External Credit
Assessment Institution (ECAI)
in April 2009. Under the
standardized approach for Syed Yusuf Hussain Asif Ali
calculating risk weighted Chairman, Bangladesh Energy Regulatory Commission Former Comptroller & Auditor General
Former Comptroller & Auditor General of Bangladesh of Bangladesh
assets against credit risk, the
credit rating is to be
determined on the basis of risk
profile assessed by the ECAIs.
Banks will use the ratings of
the ECAIs and corresponding
risk weight for calculating
M. Azizul Huq Hamidul Huq
RWA for credit risk under the Noted Expert on Islamic Banking & Managing Director
standardized approach. Former Executive President, Islami Credit Rating Agency of Bangladesh Ltd.
Bank Bangladesh Ltd.
BACKGROUND

BASEL II
Basel II is recommendatory framework for banking supervision,
issued by the Basel Committee on Banking Supervision in June
2004. The objective of Basel II is to bring about international
convergence of capital measurement and standards in the
banking system. The Basel Committee members who finalised
the provisions are primarily representatives from the G10
countries, but several countries that are not represented on the
committee have also stated their intent to adopt this
framework.
 Bangladesh Bank in December 2008, issued guidelines on the New Capital
Adequacy Framework (BRPD Circular 09, dated 31.12.08) to banks operating
in Bangladesh, based on the Basel II framework. These guidelines inform that
BB suggests implementation of Basel II with the following approaches:

i) Standardised approach for calculating RWA against credit risk;

ii) Standardised approach for calculating RWA against Market Risk; and
iii) Basic indicator approach for calculating RWA against Operational Risk.

Under the standardised approach for measuring credit risks, the risk grades are
determined on the basis of ratings assigned by the ECAIs.

RISK WEIGHTS OF CORPORATE CLAIMS UNDER BASEL II

Bangladesh Bank Equivalent Risk Weight %

Rating Grade CRAB Rating
1 AAA 20
CLAIMS ON 2 AA1, AA2 50
CORPORATE
3,4 AA3, A1, A2, A3, BBB1, 100
(excluding equity BBB2, BBB3
exposures)
5,6 BB1, BB2, BB3, 150
B1, B2, B3,
CCC1, CCC2, CCC3,
CC, C, D

Unrated - 125

MAPPING OF CRAB WITH BB RISK GRADE

BB rating grade Equivalent rating of CRAB

1 AAA

2 AA1, AA2

3 AA3, A1, A2, A3

4 BBB1, BBB2, BBB3

5 BB1, BB2, BB3, B1, B2, B3, CCC1, CCC2

6 CCC3, CC, C, D

Short Term Rating Equivalent rating of CRAB

S1 ST-1

S2 ST-2

S3 ST-3

S4 ST-4

S5 ST-5

S6 ST-6
C R A B ' S R AT I N G S E RV I C E S
FOR BANK CLIENTS UNDER BASEL II

CORPORATE/
ENTITY/
ISSUER RATING
CRAB's corporate entity or issuer rating methodology is
developed for analysis of non-financial organizations
operating in manufacturing, assembling, service sector etc.
The generic factors are common for all entities/issuers,
while criterion specific for different industries are used for
rating. There is rating criterion for rating of entities in
different industries. The rating considers the overall position
and credibility of an entity through analysis of the following
factors:
 CORPORATE RATING

Industry Risk Management

Analysis Evaluation

Business Risk Corporate

Analysis Governance
Corporate
Rating
Operating Operating
Environment Performance

Strategy and Financial Strength

Financial Policies

Strategy and Generic Rating Relationship Risk

Financial Policies Factors Analysis

RATING DEFINITION : Corporate

Long Term

AAA (Triple A) Have extremely strong capacity to meet financial commitments.

Judged to be of the highest quality, with minimal credit risk.
AA1, AA2, AA3 (Double A) Have very strong capacity to meet financial
commitments. Judged to be of very high quality, subject to very low credit risk.
A1, A2, A3 (Single A) Have strong capacity to meet financial commitments, but
susceptible to the adverse effects of changes in circumstances and economic
conditions. Judged to be of high quality , subject to low credit risk.
BBB1, BBB2, BBB3 (Triple B) Have adequate capacity to meet financial
commitments but more susceptible to adverse economic conditions or changing
circumstances. Subject to moderate credit risk. Possess certain speculative
characteristics.
BB1, BB2, BB3 (Double B) Have inadequate capacity to meet financial
commitments. Have major ongoing uncertainties and exposure to adverse
business, financial, or economic conditions. Have speculative elements, subject
to substantial credit risk.
Short Term
B1, B2, B3 (Single B) Have weak capacity to meet financial commitments. Have
ST-1: Highest Grade. Highest capacity for
speculative elements, subject to high credit risk.
timely repayment of obligations.
CCC1, CCC2, CCC3 (Triple C) Have very weak capacity to meet financial
ST-2: High Grade. Strong capacity for timely
obligations. Have very weak standing and are subject to very high credit risk.
repayment.
CC (Double C) Have extremely weak capacity to meet financial obligations.
ST-3: Average Grade. Average capacity for
Highly speculative and are likely in, or very near, default, with some prospect of
timely repayment of obligations.
recovery of principal and interest.
ST-4: Below Average Grade. Below average
C (Single C) Highly vulnerable to non-payment, have payment arrearages
capacity for timely repayment of obligations.
allowed by the terms of the documents, or subject of bankruptcy petition, but
have not experienced a payment default. Payments may have been suspended ST-5: Inadequate Grade. Inadequate
in accordance with the instrument's terms. Typically in default, with little prospect capacity for timely repayment of obligations.
for recovery of principal or interest.
ST-6: Lowest Grade. High risk of default or
D Default. Will also be used upon the filing of a bankruptcy petition or similar are currently in default.
action if payments on an obligation are jeopardized.
BANK LOAN/LINE OF CREDIT RATING

CRAB offers Bank Loan Ratings to various

types of facilities provided by banks, such as Industry
characteristics Operational
working capital demand loans, cash credit, & regulations efficiency
project loans, loans for general corporate
purposes, and non-fund-based facilities. Bank
Competitive position Management quality
loan ratings indicate the degree of risk with
Loan /Line of
regard to timely payment of interest and Credit Rating
principal on the facility being rated. Commitment to Strength of
new projects associate companies
The Bank Loan Rating service from CRAB
entails evaluating the capability of an issuer
Financial Strength Strategy &
(borrower of a bank) to timely meet its debt Financial policies
obligations against a specific line of credit, in
the light of the relevant terms, conditions and Securities Generic Loan terms
covenants. CRAB considers all relevant factors and relationship rating factors & Covenants

that have a bearing on the future cash

generation and debt servicing ability of the
borrower. A detailed analysis of past financial statements is made to assess performance under "real world"
business dynamics. Estimates of future earnings over the next three to five years under various sensitivity scenarios
are drawn up and evaluated against the claims and obligations that would require servicing. Primarily, it is the
relative comfort on the level and quality of the issuer's cash flows to service obligations that determines its rating.

RATING DEFINITION : Bank Loan/Line of Credit

Long Term
AAA (Triple A) Have extremely strong capacity to meet financial commitments.
Judged to be of the highest quality, with minimal credit risk.
AA1, AA2, AA3 (Double A) Have very strong capacity to meet financial commitments.
Judged to be of very high quality, subject to very low credit risk.
A1, A2, A3 (Single A) Have strong capacity to meet financial commitments, but
susceptible to the adverse effects of changes in circumstances and economic
conditions. Judged to be of high quality, subject to low credit risk.
BBB1, BBB2, BBB3 (Triple B) Have adequate capacity to meet financial commitments
but more suspectible to adverse economic conditions or changing circumstances.
Subject to moderate credit risk. Possess certain speculative characteristics.
BB1, BB2, BB3 (Double B) Have inadequate capacity to meet financial commitments.
Have major ongoing uncertainties and exposure to adverse business, financial, or
economic conditions. Have speculative elements, subject to substantial credit risk.
Short Term
B1, B2, B3 (Single B) Have weak capacity to meet financial commitments. Have
ST-1: Highest Grade. Highest capacity for
speculative elements, subject to high credit risk.
timely repayment of obligations.
CCC1, CCC2, CCC3 (Triple C) Have very weak capacity to meet financial obligations.
ST-2: High Grade. Strong capacity for timely
Have very weak standing and are subject to very high credit risk.
repayment.
CC (Double C) Have extremely weak capacity to meet financial obligations. Highly
ST-3: Average Grade. Average capacity for
speculative and are likely in, or very near, default, with some prospect of recovery of
timely repayment of obligations.
principal and interest.
ST-4: Below Average Grade. Below average
C (Single C) Highly vulnerable to non-payment, have payment arrearages allowed
capacity for timely repayment of obligations.
by the terms of the documents, or subject of bankruptcy petition, but have not
experienced a payment default. Payments may have been suspended in accordance ST-5: Inadequate Grade. Inadequate capacity
with the instrument's terms. Typically in default, with little prospect for recovery of for timely repayment of obligations.
principal or interest.
ST-6: Lowest Grade. High risk of default or
D Default. Will also be used upon the filing of a bankruptcy petition or similar action if are currently in default.
payments on an obligation are jeopardized.
SCOPE OF SERVICE
Scope of Service: The services to be provided by CRAB will include initial rating and surveillance during
use of the loan facility, also during the repayment period of the loan facility. Surveillance will be done on an
annual basis and will cover assessment of financial position as well as the quality of the corporate
management of the client. Rating will be completed within 4-6 weeks and surveillance within 3-4 weeks
from receipt of the data / information from the client

Information/Data Requirement: The requirements of the data have been identified in the light of the
Guidelines and the methodology indicted above, which will be further revised in our standard process of
validity testing.

BENEFITS OF RATING FOR CLIENTS (CORPORATE/BORROWERS)

FOR BORROWERS

Rating will help borrowers with wider scope of banking with decreased processing time
Rating will eventually help borrowers obtain more precise risk-based pricing on loans/investments.
Borrowers may also benefit when the capital savings that the banks enjoy are reflected in loan pricing.
Borrowers will know the parameters associated with rating and get a chance to improve on these.
They will be able to explore alternative & cheap markets of financing
The ratings may be useful in making deals with cross boarder parties and financial institutions
Will help organizations develop their corporate governance and risk management
In the long run, as many lower rated borrowers obtain BLRs, and the market understands the risk
associated with such lower ratings, access to markets for lower rated companies is likely to improve
significantly.

FOR BANKS

The new guidelines from BB create an incentive for banks to use ratings, by giving significant relief in
the capital that banks must hold against their corporate loan exposures. The highest relief of 80 per
cent is available for 'AAA' rated exposures, but there is substantial relief for exposures that are rated
below the highest category as well.
Will assist Banks to eventually enter into Internal Rating Based approach.

SPECIAL ARRANGEMENT WITH CLIENTS

We offer that Corporate would reach an arrangement with CRAB for rating of the companies and their bank
exposures. Under such arrangement Corporate will have the following privileges.

Assist Corporate in selecting the Companies under the Group for rating
CRAB would offer special rates for rating of more than one Company and/or exposure
CRAB would arrange programs for the officials of Companies for familiarization of rating
CRAB would offer special privileges to all future rating requirements of the Corporate, i.e. IPO,
Debenture, Bonds etc.
CRAB professionals would assist Corporate in providing information

AGREEMENT WITH CLIENTS

In accordance with our practice the client/obligor to be rated will have to sign an agreement with CRAB
stipulating the terms of the ratings. The rating fee will be paid by the client. The client will be responsible to
supply the required information.
 Rating Process
On demand by the Bank for rating of a client, CRAB on signing the
agreement with client, will assign a team of analysts to perform the analysis.
The rating team will collect the information and prepare the preliminary
report for internal review. A draft report will then be given to the client, for
their review. After getting feedback from client, the report will be revised
accordingly, and will be presented to the independent Rating Committee. The
Rating Committee will award the rating through a detailed discussion with
the analysts. The rating award along with a detailed report containing the
rationale and analysis will be given to the client.
 FA Q

1. When do Basel II norms come into effect?

The revised framework for capital adequacy all the scheduled banks will start implementing revised regulatory capital framework
"Risk Based Capital Adequacy for Banks" from January 2009. For the purpose of statutory compliance during the period of parallel
run i.e. 2009, the computation of capital adequacy requirement under existing rules will prevail.

2. What is the impact of Basel II on banks in Bangladesh?

Under the new framework, banks will need to provide capital for credit risk based on the risk associated with their loan portfolios. If a
bank has high-quality credit exposures (for example, if the majority of its credit exposures are in the 'AAA' and 'AA' categories) it will
save capital on account of credit risk; the difference is apparent in the illustration below. Conversely, a bank with relatively lower
rated credit exposures will need to provide more capital.

Illustration of capital-saving potential by banks on a loan of Tk. 1000 Million

Basel I Basel II

Rating Capital Capital Capital

Risk weight required* Risk weight required1 saved
(tk. mn) (tk. mn) (tk. mn)

AAA 100% 100 20% 20 80

AA1 & AA2 100% 100 50% 50 50

AA3-BBB 100% 100 100% 100 0

BB and below 100% 100 150% 135 -35

Unrated 100% 100 125% 125 -25

* Capital required is computed as Loan Amount x Risk Weight x 10%

Additionally, banks will have to provide incremental capital for market risk and operational risk. Capital for operational risk was not
part of the previous regulatory framework.

3. Is credit rating mandatory under Basel II for all bank clients/

exposures given by banks?
Credit rating is not mandatory under Basel II. However, banks are likely to be able to save capital if they get their counterparties/
loan portfolios rated. If a bank chooses to keep some of its clients/loans unrated, it may have to provide a risk weight of 125 per cent
for credit risk on such loans.
On the other hand, by getting clients/exposures rated, a bank can save capital on loans in the higher rating categories, as shown in
the illustration above. CRAB expects pricing of fresh loans to be strongly correlated with the credit ratings that such loans carry.
Higher-rated companies in particular will benefit from this development.

4. Should agreement be made with Bank or its Client?

The Rating agreement must be made between Bank's Client and Credit Rating Agency. The rating must be solicited and accepted
by a client for its use by Bank for capital adequacy calculation purpose. Banks may request and refer their clients for rating.

5. Which types of companies/facilities will be rated by CRAB?

CRAB will rate all types of companies and loans & working capital facilities of banks. The loan/line of credit ratings include project
loans, corporate loans, general purpose loans, working capital demand loans, cash credit facilities, and non-fund-based facilities like
letters of credit and bank guarantees.
6. Why will companies/bank clients
now want to get themselves rated?
Under the earlier framework, there was no need for a borrower
to have itself or its loans/ bank facilities rated. This will change
with the implementation of the new framework: BB has asked
banks to use ratings assigned by rating agencies like CRAB to
arrive at risk weights and thereby compute capital
requirements. Based on this BB requirement, banks will
require their prospective borrowers (and customers for non-
fund-based facilities) to get them or their facilities rated. Some
banks may also provide incentives (such as lower interest
rates for loans) to higher rated companies/facilities, sharing the
capital savings on such exposures.
7. Is a rating required before a
company can get a loan sanctioned,
or to renew its working capital
facilities?
Rating is not a pre-requisite for a loan sanction or for renewal
of working capital facilities. However, a bank could insist on a
rating for the borrower and loan/facility before
sanction/renewal, as it would help the bank in saving capital
and also provide an additional input for the bank in deciding on
the terms of the loan.
8. How long will CRAB take to rate a
company/bank loan?
From the day it receives a written request for a company or
bank loan rating, along with all information required for the
analysis, CRAB will take three to four weeks to complete the
exercise. If CRAB has already rated another company/facility
belonging to the same group/entity, the incremental effort
involved in the analysis would be minimal and hence the
assessment could be carried out much faster.
9. Will CRAB rate every entity of a
group (every bank facility in case of
loan rating) separately?
CRAB will assign individual ratings to each entity of a group in
case of entity rating. In case of bank loan rating or facility
rating, the rating will also be for individual facility. The validity
of each rating will be linked to the tenure of the rated facility.
10. In case of consortium/
syndicated lending, does the
borrower need to take a separate
rating for each banker?
A company that has borrowed from a consortium of lenders
can get the entire loan amount or facility rated by CRAB at one
go; a rating letter issued for the entire facility can be submitted
to all the banks in the consortium.
11. Should a company also get its
non-fund-based limits rated by
CRAB?
Under the new framework, banks will have to provide capital
on both fund-based and non-fund-based exposures. However,
the capital requirements on non-fund-based exposures are
lower than the capital requirements on fund-based exposures
of a similar magnitude. Hence, banks may initially focus on
ensuring that their fund-based exposures are rated, to
maximise their capital savings.
12. What about foreign currency
loans and external commercial
borrowings (ECBs)? Will CRAB also
rate these?
According to the new framework, risk weights on banks'
exposure to resident corporates, irrespective of the currency of
exposure, will be calculated based on ratings assigned by
domestic rating agencies such as CRAB. Accordingly, CRAB
will assign ratings for foreign currency loans taken by resident
corporate from Bangladeshi banks or foreign banks based in
Bangladesh.
Under the new framework, risk weights on banks' exposures to
non-resident corporate will be calculated based on ratings from
global rating agencies such as Standard & Poor's.
13. If a company's non-convertible
debentures are rated, can the same
rating be used by banks for all
exposures to the company?
Under the new framework, in circumstances where the
borrower has a specific assessment for an issued debt, the
rating applicable to that debt may be applied to the bank's
unrated claims for capital relief only if:
> The bank's claim ranks pari-passu with, or is senior to, the
specific rated debt in all respects, and
> The bank's claim has a maturity that is not later than the
maturity of the rated claim.
In case of short-term exposures, the risk weight to be used for
the unrated claim will be one category higher than the risk
weight for the rated claim.
14. Does a corporate have the option
to accept the rating?
The company has the option to accept or not accept the rating
assigned. Once the rating is accepted, CRAB will issue a
rating letter to the borrower, issue a press release for the
rating, post it on its website, and carry it in its ratings
publications. Only ratings that are available in the public
domain can be used by banks for calculating risk weights.
15. If the corporate does not accept
the rating, will CRAB share the rating
with the bank?
Only after the company accepts the rating, it will be publicly
released and shared with the bank.
16. What information are required
from Client while rating? What about
the confidentiality of these
information?
CRAB would require information relating to financial position
(balance sheet, income statement etc.), operations,
management, owners, sister concerns, banking relations,
suppliers & buyers, machinery, market, competition, sister
concerns etc. The information collected from client will be kept
confidentially and will be used only for rating. The full rating
report will be given only to client. A brief rating rationale
highlighting the determinants of the rating will be published
once the rating is accepted by client.
17. How long will a rating be valid?
Initial rating of a company (entity) will usually be valid for one
year. In case of loan rating the long term ratings will be valid
for one year, while the short term rating validity will be for 6
months or shorter in-case of an exposure with shorter maturity.
Services of CRAB
A. RATING SERVICE
Entity / Issuer Rating:
Banks and Financial Institutions
Insurance Companies (General & Life)
Corporate (Public & Private)
Instruments Rating:
Debt Instruments (Bonds, Debentures, Pref.
Shares etc.)
Structured Finance / Securitizations
Project Loans / Syndicated Loans
Lines of Credit
Equity Instruments (IPO, Rights)
Mutual Funds
Other Instruments
Client Rating for Banks / Financial Institutions
State Owned Entities
Micro Finance Institutions
Small & Medium Enterprises (SME)
Other Organizations / Entities
B. GRADING SERVICE
C. ADVISORY SERVICE
D. INFORMATION SERVICE
 www.crab.com.bd

CREDIT RATING AGENCY OF BANGLADESH LTD.

Head Office
Sena Kalyan Bhaban (SKB), 195 Motijheel C/A
Floor # 4, Suite # 403, Dhaka 1000, Bangladesh
Phone: 8802 9571497, 9571238, 7175368, Fax: 8802 9563837
Email: info@crab.com.bd

Chittagong Liaison Office

C&F Tower (4th Floor)
1222 Sk. Mujib Road, Agrabad C/A, Chittagong
Phone: 01973032807, Fax: 880-31-2516694
Email: ctg@crab.com.bd